The Question

Is it a breach of contract for a bank to foreclose on a property without adhering to HUD regulations requiring a face-to-face meeting (24 C.F.R. § 203.604(b)) if the subject security deed and promissory note include the following language:

In the security deed: “This security Instrument does not authorize acceleration or foreclosure if not permitted by regulations of the Secretary of the Department of Housing and Urban Development.”

In the promissory note: “This Note does not authorize acceleration when not permitted by HUD regulations.”

The Answer

YES. If HUD regulations clearly referenced in a deed and note, following the regulations are conditions precedent to the power to accelerate and the power of sale. Failing to follow the regulations can form the basis of a breach of contract action.

Sandra Bates purchased a home in Georgia in 2008 and financed it with an FHA-backed loan. JP Morgan Chase acquired the loan and became the holder of the promissory note. A security deed that accompanied the promissory note included the following language:

“This Security Instrument does not authorize acceleration or foreclosure if not permitted by regulations of the Secretary [of the Department of Housing and Urban Development].”

The promissory note similarly stated: “This Note does not authorize acceleration when not permitted by HUD regulations.”

When Bates defaulted on her loan sometime around April 2011, Chase sent her notices of its intent to foreclose. There followed several months of communications between Chase and Bates. Ms. Bates tried to make payments on her loan during that period, but failed to comply with the bank’s request that she send certified funds instead of a personal check. She also failed to pay late fees on the mortgage payments she had missed.

Eventually Bates filed suit in district court alleging that Chase had perpetrated a number of violations against her including breach of contract. The district court ruled that Bates failed to offer a cognizable claim for breach of contract and ruled in favor of JP Morgan Chase. Ms. Bates appealed the court’s judgment and the case was then heard by the United States Court of Appeals for the Eleventh Circuit. The Court of Appeals upheld the decision in favor of JP Morgan Chase, but rejected the district court’s reasoning that Chase’s actions did not constitute a breach of contract.

The following is the Court’s language where it specifically addressed the implications of mentioning HUD regulations in a promissory note or security deed:

In view of Georgia’s general rule that powers of sale in deeds are to be construed strictly, See O.C.G.A. § 23-2-114, we believe Georgia courts would hold that HUD regulations clearly referenced in a deed as conditions precedent to the power to accelerate and the power of sale could form the basis of a breach of contract action. The deed at issue here provides: “This [deed] does not authorize acceleration or foreclosure if not permitted by regulations of the Secretary.” DE 5- 2 at 6. Taken in context, this language clearly makes compliance with HUD regulations a condition precedent to the bank’s right to accelerate the debt or exercise the power of sale. Accordingly, we believe that Georgia courts would enforce the terms of the contract as written and decide that Bates has asserted a duty that Chased [sic] owed her.

In a footnote, the Court further stated that Chase could not argue that it did not bargain for a HUD Deed since both parties chose to enter into this agreement as part of a HUD program. When Chase agreed to enter into a lender agreement with Ms. Bates they agreed to use the standard note and deed at issue, including all of the HUD related language those documents contained. The court used very strong language in describing the that this must be viewed as a true breach of contract: “Prohibiting a breach of contract cause of action in these circumstances under this theory [i.e. the theory argued by Chase] would render meaningless essentially the entire agreement that Chase voluntarily signed”.

The court declined to award damages in this case because Ms. Bates could not prove any actual damage resulting directly from the acceleration of the note in violation of the HUD regulations. However, it seems clear that banks could be liable for breach of contract in other cases when a promissory note or security deed stipulate HUD regulations as a condition for acceleration of foreclosure.

The Bottom Line:

Georgia Banks Must Pay Close Attention to the Language Contained in the Loan Documents and HUD Regulations When Foreclosing on FHA-Backed Properties.

Banks and lenders doing business in Georgia are well advised to pay careful attention to HUD regulations when pursuing foreclosure on a property financed with an FHA-backed loan. The court’s reasoning clearly anticipates that borrowers with FHA-insured mortgages may have a cause of action for damages if they can prove that the lender did not comply with all applicable HUD regulations.